Market Breaks Past Resistance; Tesla’s painful transition

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The stock market rally picked up steam over the past week, with strong gains erasing key levels. The S&P 500 briefly met with resistance at the 200-day line, but broke above that key level on Friday. A host of leading stocks flashed buying points.




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Dow Jones futures open Sunday night, along with S&P 500 futures and Nasdaq futures.

Investors can gradually add exposure as the market rally improves. While many top stocks are now expanding, Wendy’s (WEN), Exxon Mobil (XOM), Quanta Services (PWR), Centigrade Holdings (CELH) and Insulation (PODD) are all usable from early entries. Wendy’s and PWR stock have new flat bases, in addition to XOM stock and Insulet. CELH shares need another week to forge a good foundation.

CELH shares are listed on SwingTrader and the IBD 50. Celsius, Insulet and Wendy’s were the most recent three IBD Stock Of The Day picks.

In the meantime, Tesla (TSLA) announced major price cuts in the US and Europe on Friday, a week after price cuts in China and key Asian markets.

Tesla shares closed modestly lower, but rebounded strongly this week. But the EV giant faces a painful transition as investors increasingly view Tesla as a carmaker, not a technology company.

The video embedded in this article reviewed the strong week before the market rally and analyzed WEN stocks, Quanta Services and Celsius.

Dow Jones Futures Today

Dow Jones futures open at 6 p.m. ET on Sunday, along with S&P 500 futures and Nasdaq 100 futures.

The US stock and bond markets are closed Monday for the Martin Luther King Jr. holiday, but other stock markets around the world are open.

Remember that overnight action in Dow futures and elsewhere does not necessarily translate into actual trading in the next regular trading session.


Join IBD experts as they analyze actionable stocks in the stock market rally on IBD Live


Stock market rally

The stock market rally had a strong week, with major indices closing close to their highs.

The Dow Jones Industrial Average rose 2% during last week’s stock trading. The S&P 500 index soared 2.7%. The Nasdaq composite jumped 4.8%. The small-cap Russell 2000 rose 5.3%.

The 10-year Treasury yield fell 6 basis points to 3.51%, despite Friday’s rally. Markets expect sharp rate hikes of a quarter point from the Fed in February and March, but then expect policymakers to wait and see. Declining government bond yields and better economic prospects elsewhere are putting pressure on the dollar, giving fresh impetus to equities and commodities.

US crude oil futures rose 8.3% last week to $79.86 a barrel. Copper prices rose by 7.65%.

ETFs

Among growth ETFs, the Innovator IBD 50 ETF (FFTY) was up 4.4% last week, while the Innovator IBD Breakout Opportunities ETF (BOUT) was up 2.1%. The iShares Expanded Tech-Software Sector ETF (IGV) rose 4.9%. The VanEck Vectors Semiconductor ETF (SMH) was up 6.7%.

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Due to more speculative story stocks, ARK Innovation ETF (ARKK) rose 14.7% last week and ARK Genomics ETF (ARKG) rose just over 16% last week. TSLA stock is a major stock in Ark Invest’s ETFs. Cathie Wood’s Ark has been replenishing its Tesla holdings in recent days and weeks.

SPDR S&P Metals & Mining ETF (XME) bounced 6.3% last week to a seven-month high. The Global X US Infrastructure Development ETF (PAVE) rolled 4.2% higher. US Global Jets ETF (JETS) rose 9.4%. SPDR S&P Homebuilders ETF (XHB) Gained 4.6% Despite Weak Price KB Home (KBH) income. The Energy Select SPDR ETF (XLE) was up 0.14%, with XOM stocks a key component. The Financial Select SPDR ETF (XLF) rose 2.1%. The Health Care Select Sector SPDR Fund (XLV) fell slightly by 0.2%.


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Stocks in buying areas

Wendy’s stock experienced a major upside reversal on Friday, jumping 6% to 23.08 after hitting an intraday low of 21.36. WEN shares regained their 50-day line, moved above the 21-day line and broke above a trendline. That offered an early entry into the new flat base. The official buy point is 23.88, according to MarketSmith’s analysis.

Wendy’s Friday reported a fourth straight quarter of accelerating revenue growth, doubled its dividend and announced a $500 million buyback.

XOM shares rose 2.4% last week to 113.16, its fifth straight weekly gain. The shares are slightly below the official buy point of 114.76, and with that move, they don’t appear to be extending from the 50-day line. But investors were already able to enter Exxon stock.

PWR shares rose 6.7% to 148.50 last week and recovered above the 50-day line, offering early entry. Shares also recovered a previous buy point of 144.41 which is no longer valid.

CELH shares dipped above the 50-day and 21-day lines on Wednesday, breaking a downtrend and providing multiple reasons for an early entry. Shares held support through the 21st day, then peeked higher on Friday. Celsius shares are now usable after rising 13.2% for the week.

Insulet stocks rose 4.65% over the past week to 305.89, recovering from the 21-day and 50-day lines. Stocks are now action-oriented. But investors can wait for a trend line to break, currently slightly above Friday’s high of 309.44.

Switching Tesla stock back to auto?

Tesla shares rose 8.3% last week to 122.40, continuing the rebound from the January 6 bear market low of 101.81. Shares fell 0.9% on Friday, well off the day’s lows despite Tesla’s announcement of sweeping price cuts in the US and Europe. That came a week after Tesla cut prices in China and key Asian markets.

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The price cuts should boost sales, especially in the US, with more Tesla EV variants eligible for a $7,500 tax credit. That means a huge price reduction for American consumers. But Tesla’s appreciated margins are likely to take a hit.

Investors will get weekly Chinese EV registrations on Tuesday, which should show a big jump in Tesla sales, as well as some potential impact on rivals. But will Tesla get a lasting boost, especially in China and Europe? Orders were significantly behind deliveries at the end of 2022, so Tesla needs a big boost in new demand to maintain the current pace of delivery in 2023.

Already fierce competition in China will intensify in 2023, with Tesla’s price cuts perhaps sparking a wave of margin-destroying cuts. It is also getting busier in Europe. Even the US EV market will be more competitive a year from now, with the fall in used car prices already putting a major drag on new vehicle prices.

But aside from Tesla’s EV sales, TSLA stock has a bigger problem. Investors are increasingly seeing the EV giant as an automaker, not a technology company. Tesla’s current price-to-earnings ratio of 33 is not too high for a tech growth company. But it’s unusually high for a car manufacturer. The auto industry’s benefits and margins tend to decline relatively quickly, which may be happening with Tesla right now.

TSLA stock may deserve a high valuation for a car manufacturer, a reflection of the EV giant’s still robust earnings per share and revenue growth. Still, that would suggest a much lower valuation than was claimed until recently.

General engines (GM), ford (F) and Chrysler-and-Fiat parent Stellantis (STLA) all have PE ratios in the single digits. Toyota (TM) is at 10.


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Analysis of the market rally

The stock market rally had an encouraging week, building on strong gains on January 6. The major indices rose solidly and reached important levels again. A host of leading stocks flashed buy signals during the week, with most of them gaining on holdings or expansion.

The S&P 500 index moved above its 50-day moving average and reached its 200-day line. The reference index encountered resistance at that key level on Thursday-Friday, but eventually rose above it.

Above all, the Dow Jones, Russell 2000 and S&P MidCap 400 are their moving averages and are approaching their short-term highs in December.

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The Nasdaq recaptured its 50-day moving average and crossed above 11,000. The laggard index was close to the bear market low at the start of the year.

On Friday, shares opened solidly lower as gains initially hit airlines, health insurers and banking stocks, Tesla price cuts slammed auto stocks and analysts’ downgrade hit major defense contractors.

Even without the negative headlines, the market was probably due for a pullback after the strong gains and with the S&P 500 at the 200-day mark.

Still, the market recovered quickly and closed higher.

The industrial sector, the broad housing sector, many medical companies, as well as some retailers and restaurants are showing strength. Tech names are still scarce among leading stocks, although they are trying to come back. The SMH chip ETF has crossed its 200-day mark this past week, while the IGV software ETF and ARKK are above their 50-day moving average.

The S&P 500 has yet to break the 200-day mark. December’s highs loom large for all major indices.

While the stock market seems less concerned about the Federal Reserve, with a path to a pause in the direction of a rate hike, earnings season will be the focus.


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What to do now

Investors can make new purchases as the stock continues to improve. But do that gradually. While the market rally has shown strength and resilience over the past few days, a pullback should come as no surprise for major indices, key sectors or individual stocks.

Earnings season will intensify in the coming weeks, creating the potential for large swings. Exxon and Tesla stock will report within the next three weeks, along with tech giants Apple (AAPL), Microsoft (MSFT), Amazon.nl (AMZN) and Google older Alphabet (GOOGL).

So don’t focus too much on a particular sector, even if it is performing well. Strive for a diversity of leading stocks.

Replenish your watchlists. Look for stocks that are usable, are setting up, or could potentially be usable if they pause or pull back. Broad power, at least outside of technology, should provide some opportunities.

Read The Big Picture every day to stay in sync with market direction and leading stocks and sectors.

Follow Ed Carson on Twitter at @IBD_ECarson for stock market updates and more.

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